What is money? What is currency? How are currencies created, and how do they die?
Have a look at the most comprehensive description of money.
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You Need To Know How Currency Is Created And How It Dies
Money makes the world go around, but most people have no clue what money is. Even most so-called economists have no clear definition of money.
Investopedia defines money as a medium of exchange, but that completely misses the point.
So here’s a simple way to describe money.
Money is financial energy.
It’s an energy that people exchange for property, products, or services.
And to define how much energy we need for a particular purchase, we use a currency.
In other words, the currency is a tool to measure financial energy.
For example, you may purchase an apartment for euros in Europe, but in the US, the euros are useless unless you convert them to the American measure of economic energy, the US dollar.
How is a currency created?
Currencies are created by governments.
They enforce the usage of their currencies by law and special tax status.
Currencies may be transferred and held tax-free as opposed to property, products, or services.
For instance, if we transfer 50,000 euros to a car dealer, we may purchase a car without being subject to capital gains tax. Such a transaction would not be possible with stocks or bitcoin; it would incur a capital gain tax.
Let alone; you wouldn’t be able to legally purchase a car with anything other than the legal tender. Every accountant would reject any currency which is not legal tender in a particular country.
If money is electricity, the currency is a transmission
Here’s one analogy of how to understand money.
If money is like electricity, then the currency is the transmission and distribution of electricity.
That is to say, central and commercial banks may transmit and distribute the currency, but they can never create more money.
They merely provide methods to move and disperse currency in the system. They don’t generate more wealth or financial energy.
For instance, if today 10 dollars replaced every dollar, the system wouldn’t have ten times more financial energy.
10% of your currency dies every year
But here is the main issue with currencies.
Our transmission and distribution system doesn’t transmit 100% of all money produced.
10-15% of financial energy is lost yearly in Europe and the US. Think about it, with the 10% loss, half our financial energy dies every seven years.
Government currencies are, therefore, highly inefficient stores of value. As they leak energy, inevitably, they return to their intrinsic value, which is zero.
There are two possible solutions to the problem.
First, we can create a currency that doesn’t lose financial energy.
Second, we can transfer our currencies to better stores of value.
The first potential solution is addressed by bitcoin. Unfortunately, not all governments have realized it yet.
In the meantime, we must resort to the second solution and invest in store of value assets.
But all stores of value are not created equal. Suppose we look at the last ten years. Stocks returned on average per year 17%, bonds 3.7%, gold 3.3%, and bitcoin, even after the crash, 90%.
If we assume that the dollar loses 10% a year in financial energy, we must search for stores of value higher than 10%. Everything else is a guaranteed loss of your economic energy.
It’s important to remember that currency isn’t money. Fiat currency is just a tool to measure, move and distribute money; in the process, it wastes money.
As a result, people can’t save in currency. Instead, they’re pushed to become speculators in stocks or use their homes as savings accounts.
But they have no choice; holding currencies is a guaranteed loss.